Approved Retirement Funds [ARF] introduced in the Finance Act, 1999 allowed retirees to invest their pension pot in an ARF rather than purchasing an annuity – a guaranteed pension for life.

The factors driving those decisions are:

  • Since 2008, interest rates and bond yields have been close to zero
  • People are living longer.
  • Combined, these factors have forced down annuity rates, making them relatively unattractive to retirees

In addition, retirees welcomed the ARF flexibility of being able to draw down a large lump sum for a trip of a lifetime or by taking more income than would be available in an annuity.

It is important the withdrawal strategy from an ARF is managed carefully to ensure your money lasts as long as you do.

While investment markets have rebounded from earlier falls, the outlook for risk assets remains uncertain.

Anyone who relies on a regular income from their investments should be aware of the concept of euro-cost ravaging. This simply means if your investment falls in value, it needs to work harder to regain its losses.

For example, in the first 3 weeks of March the FTSE 100 fell by 32%. An investment of €100,000 was then worth €68,000. Since then there has been a recovery of 27% and this fund is now worth €86,000. To get back to €100,000 will require total growth of 47%.

ARF investors also run ‘sequencing risk’ – that is how the order of good and bad returns impacts on how long your money will last. Even good returns following poor returns in the earlier years can have a disproportionately negative effect.

Many investors may need to take on more risk in the hope of targeting extra growth.

What about those with little appetite for more investment risk?

  • They may just have to rein in their spending
  • The bank of mum and dad may have to close;
  • No help for your children with their deposit for a house;
  • No saving for grandchildren.
  • Downsizing to a smaller house might have to be considered.

Adelphi Financial Brokers will give you expert advice.